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Do you Love the Smell of Fear in the Morning?

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Napalm, son. Nothing else in the world smells like that. I love the smell of napalm in the morning.
-Lieutenant Colonel Bill Kilgore, Apocalypse Now

It looks like traders are starting to worry about serious downside.

Yesterday, I pointed out that safety assets were showing big gains amid rising geopolitical tensions.

Today, the VIX jumped over 16 for the first time since November 10, 2016. And the VIX is stil trading as a massive premium to actual market volatility.

And one of my favorite sentiment indicators — the CBOE Equity Put/Call ratio — skyrocketed to 0.79 yesterday.

This is well above the YTD average of 0.65.

As you can see in the chart below, we've seen 4 spikes to similar levels in the past 5 months.

And all of those spikes occurred near interim lows in the S&P 500.

Traders can rarely use sentiment indicators as buy/sell signals. They tend to only be useful at extremes.

For the CBOE Equity Put/Call, a 0.79 is an outlier, but not a major league freakout.

Nonetheless, this latest reading implies that traders are rapidly pricing a lot of fear into the market.

When I complete my next Weekly Sentiment Update tomorrow, we should see even more bearishness than last week.

The big question now becomes: is a lot of fear enough fear to form a bottom?

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